In economics, the fiscal multiplier (not to be confused with the money multiplier) is the ratio of change in national income or revenue arising from a change in government spending. More generally, the exogenous spending multiplier is the ratio of change in national income arising from any autonomous change in spending (including private investment spending, consumer spending, government spending, or spending by foreigners on the country's exports). When this multiplier exceeds one, the enhanced effect on national income may be called the multiplier effect. The mechanism that can give rise to a multiplier effect is that an initial incremental amount of spending can lead to increased income and hence increased consumption spending, increasing income further and hence further increasing consumption, etc., resulting in an overall increase in national income greater than the initial incremental amount of spending. In other words, an initial change in aggregate demand may cause a change in aggregate output (and hence the aggregate income that it generates) that is a multiple of the initial change.
The existence of a multiplier effect was initially proposed by Keynes' student Richard Kahn in 1930 and published in 1931. The multiplier theory was developed to provide rigorous justification for public works spending. Lloyd George, the Liberal candidate in his 1929 election pledge had proposed a public works scheme to reduce unemployment. Keynes and Hubert Henderson wrote a pamphlet titled “Can Lloyd George Do It?: An Examination of the Liberal Pledge” backing his proposal. Richard Kahn's calculations were meant to show that much of the Treasury’s expenditure would be recouped through higher taxes and less spending on unemployment insurance.
